20007ipcc Paper5 cp9

9
Accounting for Branches Including

Foreign Branches
Learning Objectives
After studying this chapter, you will be able to:
Distinguish between the accounting treatment of dependent branches and
independent branches.
Learn various methods of charging goods to branches.
Solve the problems, when goods are sent to branch at wholesale price.
Prepare the reconciliation statement of branch and head office transactions after
finding the reasons for their disagreement.
Incorporate branch balances in the head office book.
Prepare branch accounts even on the basis of incomplete information.
Differentiate between integral and non-integral foreign branches.
Learn the techniques of foreign currency translation.
1. Introduction
As per Section 29 of the Companies Act, 1956, a branch can be described as any
establishment carrying on either the same or substantially the same activity as that carried on
by head office of the company. It must also be noted that the concept of a branch means
existence of a head office for there can be no branch without a head office - the principal
place of business. From the accounting point of view, branches may be classified as follows:
(i) Branches in respect of which the whole of the accounting records are kept at the head
office,
(ii) Branches which maintain independent accounting records, and
(iii) Foreign Branches.
The Institute of Chartered Accountants of India
9.2 Advanced Accounting

2. Dependent Branches
When the business policies and the administration of a branch are wholly controlled by the
head office and its accounts also are maintained by it the branch is described as Dependant
branch. Branch accounts, in such a case, are maintained at the head office out of reports and
returns received from the branch. Some of the significant types of branches that are operated
in this manner are described below:
(a) A branch set up merely for booking orders that are executed by the head office. Such a
branch only transmits orders to the head office;
(b) A branch established at a commercial centre for the sale of goods (wholesale) supplied
by the head office, and under its direction all collections are made by the H.O.; and
(c) A branch for the retail sale of goods, supplied by the head office.
Accounting in the case of first two types is simple. Only a record of expenses incurred at the
branch has to be maintained.
But however a retail branch is essentially a sale agency that principally sells goods supplied
by the head office for cash and, if so authorised, also on credit to approved customers.
Generally, cash collected is deposited into a local bank to the credit of the head office and the
head office issues cheques thereon for meeting the expenses of the branch. In addition, the
Branch Manager is provided with a float for petty expenses which is replenished from time to
time on an imprest basis. If, however, the branch also sells certain lines of goods, directly
purchased by it, the branch retains a part of the sale proceeds to pay for the goods so
purchased.
There are various methods of recording transactions between the head office and a branch
which vary from one another.
3. Methods of Charging Goods to Branches
Goods may be invoiced to branches (1) at cost; or (2) at selling price; or (3) in case of retail
branches, at wholesale price.
Selling price method is adopted where the goods would be sold at a fixed price by the branch.
It is suitable for dealers in tea, petrol, vanaspati ghee, etc. In this way, greater control can be
exercised over the working of a branch in as much as that the branch balance in the head
office books would always be composed of the value of unsold stock at the branch and
remittances or goods in transit. The arbitrary price method is usually adopted if the selling
price is not known or when it is not considered desirable to disclose to the branch manager
the profit made by the branch.
3.1 When goods are invoiced at cost
If goods are invoiced to the branch at cost, the trading results of branch can be ascertained by
following either the Debtors Methodor Stock and Debtors method.
Accounting for Branches including Foreign Branches 9.3

For this purpose, it is assumed that the branch is an entity separate from the head office. On
the basis, a Branch Account is stated in the head office books to which the price of goods or
services provided or expenses paid out are debited and correspondingly, the value of benefits
and cash received from the branch are credited.
(a) Debtors method : The opening balance of stock, debtors (if any), petty cash (if any), are
debited to the Branch Account; the cost of goods sent to branch as well as expenses of the
branch paid by the head office, e.g., salaries, rent, insurance, etc., are also debited to it.
Conversely, amounts remitted by the branch and the cost of goods returned by the branch are
credited. At the end of the year, the value of unsold stock, the total customers balances
outstanding and that of petty cash are brought into the branch account on the credit side and
then, the branch account will reveal profit or loss;
Debit balance will be the loss suffered by the working of the branch and vice versa. If the
branch also is allowed to make small purchases of goods locally as well as to incur expenses
as only details of such expenditure will be furnished by the branch to the head office.
If on the other hand, purchases are made out of cash receipts, it will also be necessary for the
branch to supply to the head office a copy of the Cash Account, showing details of cash
collections and disbursements. To illustrate the various entries which are made in the Branch
Account, the proforma of a Branch Account is shown below:
Proforma Branch Account

To Balance b/f By Cash remitted
Stock Return to H.O.
Debtors By Balance c/d
Petty Cash Cash
To Goods sent to Branches Debtors
Bank Petty Cash
Salaries By Profit and Loss A/cLoss
Rent (if debit side is larger)
Sundry Expenses
To Profit & Loss A/cProfit
(if credit side is larger)
Note:
1. Having credited the Branch Account by the actual cash received from debtors it would be
wrong to debit the Branch Account, in respect of discount or allowances to debtors.
2. The accuracy of the trading results as disclosed by the Branch Account, so maintained, if
considered necessary, can be proved by preparing a Memorandum Branch Trading and
Profit & Loss Account, in the usual way, from the balances of various items of income and
expenses contained in the Branch Account.

Illustration 1
BuckinghamBros, Bombay have a branch at Nagpur. They send goods at cost to their branch
at Nagpur. However, direct purchases are also made by the branch for which payments are
made at head office. All the daily collections are transferred fromthe branch to the head
office.
Fromthe following, prepare Nagpur branch account in the books of head office by Debtors
method:
` `
Imprest Cash 2,000 Bad Debts 1,000
Sundry Debtors 25,000 Discount to Customers 2,000
Stock: Transferred fromH.O. 24,000 Remittances to H.O.
Direct Purchases 16,000 (recd. by H.O.) 1,65,000
Opening balance 1-1-2010
Cash Sales 45,000 remittances to H.O.
Credit Sales 1,30,000 (not recd. by H.O. so far) 5,000
Direct Purchases 45,000 Branch Exp. directly paid by
H.O.
30,000
Returns fromCustomers 3,000 Closing Balance (31-12-2010)
Goods sent to branch fromH.O. 60,000 Stock: Direct Purchase 10,000
Transfer fromH.O. for Petty Transfer fromH.O. 15,000
Cash Exp. 4,000 Debtors ?
Imprest Cash ?
Solution
In the Books of BuckinghamBros, Bombay
Nagpur Branch Account
` `
To Opening Branch
Assets
By Bank Remittances
Stock 40,000 rec. from the branch
Debtors 25,000 Cash Sales 45,000
Imprest Cash 2,000 Cash from Drs. 1,20,000
To Goods sent to
Branch A/c
60,000 Cash from Drs. in transit
5,000

1,70,000
To Creditors (Direct
Pur.)
45,000
To Bank (Sundry
exp.)
30,000 By Branch Assets at close:
To Bank (Petty Cash
exp.)
4,000 Stock:
Transfer from H.O.

15,000
To Net Profit Direct Purchase 10,000

transferred to
General Profit &
Loss A/c
15,000 Sundry Debtors (W.N. 2) 24,000
Imprest Cash (W.N. 3) 2,000
2,21,000 2,21,000
Working Notes:
(1) Collections fromdebtors:
`
Total remittances (` 1,65,000 + ` 5,000) 1,70,000
Less: Cash sales (45,000)
1,25,000
(2) Calculation of Sundry Debtors closing Balance:
`
Opening Balance 25,000
Add: Credit Sales 1,30,000
1,55,000
Less: Returns, Discount, Bad debts & collections (3,000 + 2,000 +
1,000 + 1,25,000)

(1,31,000)
Closing balance 24,000
(3) It is assumed that petty cash expenses of the branch for the year were ` 4,000.
(b) Branch Trading and Profit and Loss Account Method: In this approach, Profit and
Loss accounts are prepared considering each branch as a separate entity. The main
advantage in this method is that, it is easy to prepare and understand.
Illustration 2
Fromthe information given in the illustration 1, prepare Nagpur Branch Trading and Profit and
Loss Account in the books of head office.
Solution
BuckinghamBros. Bombay
Nagpur Branch-Trading and Profit and Loss Account
for the year ending 31st December, 2010
` ` `
To Opening Stock 40,000 By Sales
To Goods transferred from Cash 45,000
Head Office 60,000 Credit sales 1,30,000
To Purchases 45,000 1,75,000
To Gross Profit c/d 52,000 Less: Returns (3,000) 1,72,000

By Closing Stock 25,000

1,97,000 1,97,000

To Expenses 30,000 By Gross Profit b/d 52,000
To Discounts 2,000
To Bad Debts 1,000
To Petty Cash Expenses 4,000
To Net Profit transferred to
General P/L A/c 15,000
52,000 52,000
The students may note that Gross Profit and Net Profit earned by the branch are ascertainable
in this method and also evaluating the performance of the branch is very much easier in this
method than in the Debtors method.
(c) Stock and Debtors method: If it is desired to exercise a more detailed control over the
working of a branch, the accounts of the branch are maintained under what is described as the
Stock and Debtors Method. According to this method, the under-mentioned four accounts
have to be kept:
(a) Branch Stock Account (or Branch Trading Account).
(b) Branch Profit & Loss Account.
(c) Branch Debtors Account (if any).
(d) Branch Expenses Account.
If the branch is also allowed to purchase goods locally and to incur expenses out of its cash
collections, it would be necessary to maintain (i) a Branch Cash Account, and (ii) an
independent record of branch assets. All these accounts are kept by the H.O.
The manner in which entries are recorded in the above method is shown below:
Transaction Account debited Account credited
(a) Cost of goods sent to the Br. Stock A/c Goods sent to Br. A/c
Branch
(b) Remittances for expenses Br. Cash A/c (H.O.) Cash A/c
(c) Any assets (e.g. furniture) Br. Asset (Furniture) A/c (i) (H.O.) Cash A/c or
provided by H.O. (ii) Creditors A/c
(iii) (H.O.) Furniture A/c
(d) Cost of goods returned by Goods sent to Br. A/c Br. Stock A/c
the branch
(e) Cash Sales at the Branch Br. Cash A/c Br. Stock A/c
(f) Credit Sales at the Branch Br. Debtors A/c Br. Stock A/c
(g) Return of goods by debtors Br. Stock A/c Br. Debtors A/c
to the Branch

(h) Cash paid by debtors Br. Cash A/c Br. Debtors A/c
(i) Discount & allowance to Br. Expenses A/c Br. Debtors A/c
debtors, bad debts
(j) Remittances to H.O. (H.O.) Cash A/c Br. Cash A/c
(k) Expenses met by H.O. Br. Expenses A/c (H.O.) Cash A/c
(l) Closing Stock: Credit the Branch Stock Account with the value of closing stock at cost. It
will be carried down as opening balance (debit) for the ensuing period. The Balance of
the Branch Stock Account, (after adjustment therein the value of closing stock), if in
credit, will represent the gross profit on sales and vice versa.
Other Steps
(m) Transfer Balance of Branch Stock Account to the Branch Profit and Loss Account.
(n) Transfer Balance of Branch Expenses Account to the debit of Branch Profit & Loss
Account.
(o) The balance in the Branch P&L A/c will be transferred to the (H.O.) Profit & Loss
Account.
The credit balance in the Goods sent to Branch Account is afterwards transferred to the Head
Office Purchase Account or Trading Account (in case of manufacturing concerns), it being the
value of goods transferred to the Branch.
Given below is a simple problem, the solution whereto has been prepared in all the three
methods so as to show the distinguishing features of these methods.
Illustration 3
The Bombay Traders invoiced goods to its Delhi branch at cost. Head Office paid all the
branch expenses fromits bank account, except petty cash expenses which were met by the
Branch. All the cash collected by the branch was banked on the same day to the credit of the
Head Office. The following is a summary of the transactions entered into at the branch during
the year ended December 31, 2010.
` `
Stock J anuary 1 7,000 Bad Debts 600
Debtors, J anuary 1 12,600 Goods returned by customers 500
Petty Cash, J anuary 1 200 Salaries & Wages 6,200
Goods sent fromH.O. 26,000 Rent & Rates 1,200
Goods returned to H.O. 1,000 Sundry Expenses 800
Cash Sales 17,500 Cash received fromSundry
Credit Sales 28,400 Debtors 28,500
Allowances to customers 200 Stock, Dec. 31 6,500
Discount to customers 1,400 Debtors, Dec. 31, 9,800
Petty Cash, Dec. 31 100

Prepare: (a) Branch Account (Debtors Method), (b) MemorandumBranch Trading and Profit &
Loss Account to prove the results as disclosed by the Branch Account and (c) Branch Stock
Account, Branch Profit & Loss Account, Branch Debtors and Branch Expenses Account by
adopting the Stock and Debtors Method.
Solution
(A) Debtors Method
Delhi Branch Account
2010 ` ` 2010 ` `
Jan. 1 To Balance b/d Dec. 31 By Bank
Stock 7,000 Cash Sales 17,500
Debtors 12,600 Cash from
Petty cash 200 19,800 Sundry Debts. 28,500 46,000
Dec.
31
To Goods sent to By Goods sent to
Branch A/c 26,000 Br. A/c
Returns

To Bank: to H.O. 1,000
Salaries &
Wages
6,200 By Balance c/d
Rent & Rates 1,200 Stock 6,500
Sundry Exp. 800 8,200 Debtors 9,800
To Balance being Petty Cash 100 16,400
Profit carried to
(H.O.) P & L
A/c

9,400

63,400 63,400
Jan. 1,
2011
To Balance b/d 16,400
(B) MemorandumBranch Trading and Profit and Loss Account
J an. 1 ` ` ` `
To Stock 7,000 By Sales:
To Goods sent Cash 17,500
from H.O. 26,000 Credit 28,400
Less : Returns to
H.O.

(1,000)

25,000
Less:
Returns

(500)

27,900

45,400
To Gross profit c/d 19,900

By Closing
Stock

6,500
51,900 51,900

To Salaries & Wages 6,200 By Gross Profit b/d 19,900
To Rent & Rates 1,200
To Sundry Exp. 800
To Petty Cash Exp. 100
To Allowances to
Customers
200
To Discounts 1,400
To Bad Debts 600
To Net Profit 9,400
19,900 19,900
Stock and Debtors Method
Branch Stock Account
2010 ` 2010 ` `
Jan. 1 To Stock 7,000 Dec. 31 By Sales:
Dec. 31 To Goods Sent
to
26,000 Cash 17,500
Branch A/c Credit 28,400
To Branch P & L
A/c (Gross
profit c/d)

19,900 Less: Ret. (500) 27,900 45,400
By Goods sent
to Br. A/c -
Return
1,000

By Balance c/d
(Stock)

6,500
52,900 52,900
2011
Jan. 1
Delhi Branch Debtors Account
2010 ` 2010 `
Jan. 1 To Balance b/d 12,600 Dec. 31 By Cash 28,500
Dec. 31 To Sales 28,400 By Returns 500
By Allowances 200
By Discounts 1,400
By Bad debts 600
By Balance c/d 9,800
41,000 41,000
2011 Jan. 1 To Balance b/d 9,800


Delhi Branch Expenses Account
2010 ` 2010 `
Dec. 31 To Salaries & Wages 6,200 Dec. 31 By Branch P & L
A/c
10,500
To Rent & Rates 1,200
To Sundry Expenses 800
To Petty Cash
Expenses
100
To Allowances to
customers
200
To Discounts 1,400
To Bad Debts 600
10,500 10,500
Delhi Branch Profit &Loss Account
2010 ` 2010 `
Dec. 31 To Branch Exp. A/c 10,500 Dec. 31 By Gross Profit b/d 19,900
To Net Profit to
General P & L A/c 9,400
19,900 19,900
3.2 When goods are invoiced at selling price
It would be obvious that if Branch Account is debited with the sales price of goods and
subsequent to the debit being raised there is a change in the sale price, the amount of debit
either has to be increased or reduced on a consideration of the quantity of unsold stock that
was there at the branch at the time the change took place. Such an adjustment will be
necessary as often as the change in sale price occurs.
Moreover the amount of anticipatory profit, included in the value of unsold stock with the
branch at the close of the year will have to be eliminated before the accounts of the branch
are incorporated with that of the head office. This will be done by creating a reserve.
It may also be necessary to adjust the value of closing stock on account of the physical losses of
stock due to either pilferage or wastages which may have occurred during the year. The last
mentioned adjustments are made by debiting the cost of the goods to Goods Lost Account and the
amount of loading (included in the lost goods), to the Branch Adjustment Account. The three different
methods that are usually adopted for maintaining accounts on this basis are described below:
(a) Stock and Debtors Method: For the purpose, it would be necessary to maintain
accounts mentioned below at the head office:
Branch Stock Account.
Goods sent to Branches Account.

Branch Adjustment Account.
Some important points should be kept in mind while following stock and debtors method:
(i) Entries in the accounts are made in the following manner:
` Transaction Accounts debited Accounts credited
(a) Sale price of the Branch Stock A/c (i) Goods sent to
Branches
goods sent from (at selling price) A/c with cost of the
H.O. to the Branch goods sent.
(ii) Branch Adjustment
A/c
(with the loading i.e.,
difference between
the
selling and cost price).
(b) Return of goods (i) Goods sent to Br. A/c Branch Stock A/c
By the Branch to H.O. (with the cost of
goods returned).
(ii) Branch Adjustment A/c
(with the loading)
(c) Cash sales at the Br. Cash/Bank A/c Branch Stock A/c
(d) Credit Sales at the Br. Branch Debtors A/c Branch Stock A/c
(e) Goods returned to Branch Stock A/c Branch Debtors A/c
Branch by customers (at selling price)
(f) Goods lost in (i) Goods Lost in Transit A/c Branch Stock A/c
Transit or stolen or Goods Stolen A/c
(with cost of the goods)
(ii) Branch Adjustment A/c
(with the loading)
(ii) Closing Stock: The balance in the Branch Stock Account at the close of the year
normally should be equal to the unsold stock at the Branch valued at sale price.
But quite often the value of stock actually held at the branch is either more or less than the
balance of the Branch Stock Account. In that event it will be necessary that the balance in the
Branch Stock Account is increased or reduced by debit or credit to Goods Lost Account (at
cost price of goods) and Branch Adjustment Account (with the loading). The Stock Account at
selling price, thus reveals loss of stock (or surplus) and serves as a check on the branch in
this respect.

The discrepancy in the amount of balance in the Branch Stock Account and the value of stock
actually in hand, valued at sale price, may be the result of one or more of the under-mentioned
factors:
An error in applying the percentage of loading.
Goods having been sold either below or above the established selling price.
A Commission to adjust returns or allowances.
Physical loss of stock due to natural causes or pilferage.
Errors in Stock-taking.
For example, the balance brought down in the Branch Stock Account is ` 100 in excess of the
value of stock actually held by the branch when the goods were invoiced by the head office to
the branch at 20% above cost and the discrepancy is either due to pilferage or loss by fire, the
actual loss to the firmwould be ` 80, since 20% of the invoice price would represent the
element of profit. The adjusting entry in such a case would be:
Dr.` Cr. `
Goods Lost A/c Dr. 80
Branch Adjustment A/c Dr. 20
To Branch Stock A/c 100
If on the other hand, a part of the sale proceeds has been misappropriated, then the adjusting
entry would be:
Dr. Cr.
Loss by theft A/c Dr.
Branch Adjustment A/c Dr.
To Branch Stock A/c
Rebates and allowances allowed to customers are adjusted by debiting the amounts of such
allowances to Branch Adjustment Account and crediting Branch Stock Account. But, if the
gross amount of sale has been debited to Branch debtors Account, this account would be
credited instead of Branch Stock Account, since the last mentioned account would have
already received credit for the full value.
In the Goods Sent to Branch Account, the cost of the goods sent out to a branch for sale is
credited by debiting Branch Stock Account. Conversely, the cost of goods returned by the
branch is debited to this account. As such the balance in the account at the end of the year
will be the cost of goods sent to the branch; therefore, it will be transferred either to the
Trading Account or to Purchases Account of the head office.
To the Branch Adjustment Account the amount of profit anticipated on sale of goods sent to
the branch is credited and conversely, the amount of profit not realised in respect of goods
returned by the branch to head office or that in respect to stock remaining unsold with the
branch at the close of the year is debited. The balance in this account, at the end of year thus

will consist of the amount of Gross Profit earned on sale by the branch. On that account, it will
be transferred to the Branch Profit and Loss Account.
(iii) Elimination of unrealised profit in the closing stock: The balance in the Branch Stock
account would be at the sale price; therefore it would be necessary to eliminate the element
of profit included in such closing stock. This is done by creating a reserve against unrealised
profit, by debiting the Branch Adjustment Account and crediting Stock Reserve Account with
an amount equal to the difference in the cost and selling price of unsold stock. Sometimes
instead of opening a separate account in respect of the reserve, the amount of the difference
is credited to Branch Stock Account. In that case, the credited balance of such a reserve is
also carried forward separately, along with the debit balance in the Branch Stock Account; the
difference between the two would be the value of stock at cost.
In either case, the credit balance will be deducted out of the value of closing stock for the
purpose of disclosure in the balance sheet, so that the stock is shown at cost.
An Alternative method: Where the gross profit of each branch is not required to be
ascertained separately, although the selling price is uniform, the amount of goods sent to the
branch is recorded only in two accounts namely - Branch Stock Account and Goods Sent to
Branch A/c.
At the end of the year the Branch Stock Account is closed by transfer of the balance
representing the value of closing stock, at sale price, to the Goods Sent to Branch Account.
This has the effect of altogether eliminating from the books the value of stock at the branch.
The balance of Goods sent to Branch Account is afterwards transferred to the Trading
Account representing the net sale price of goods sold at the branch. In that case, the value of
closing stock at the branch at cost will be subsequently introduced in the Trading Account
together with that of closing stock at the head office.
Illustration 4
Harrison of Chennai has a branch at New Delhi to which goods are sent @ 20% above cost.
The branch makes both cash and credit sales. Branch expenses are met partly fromH.O. and
partly by the branch. The statement of expenses incurred by the branch every month is sent to
head office for recording.
Following further details are given for the year ended 31st December, 2010:
`
Cost of goods sent to Branch at cost 2,00,000
Goods received by Branch till 31-12-2010 at invoice price 2,20,000
Credit Sales for the year @ invoice price 1,65,000
Cash Sales for the year @ invoice price 59,000
Cash Remitted to head office 2,22,500
Expenses paid by H.O. 12,000
Bad Debts written off 750

Balances as on 1-1-2010 31-12-2010
` `
Stock 25,000 (Cost) 28,000 (invoice price)
Debtors 32,750 26,000
Cash in Hand 5,000 2,500
Show necessary ledger accounts in the books of the head office and determine the Profit and
Loss of the Branch for the year ended 31st December, 2010.
Solution
Books of Harrison
Branch Stock A/c
` `
1-1-10 To Balance b/d 30,000 By Branch
Debtors
1,65,000
To Goods Sent to By Branch Bank 59,000
Branch A/c 2,40,000 31-12-10 By Balance c/d
To Branch Adjustment A/c Goods in
Transit

(Excess of sale (` 2,40,000
over invoice price) 2,000 ` 2,20,000) 20,000
Stock at
Branch
28,000

2,72,000 2,72,000
Branch Debtors A/c
` `
1-1-10 To Balance b/d 32,750 By Bad debts w/o 750
To Branch Stock 1,65,000 By Branch Cash-
collection (bal.fig.)
1,71,000
31.12.10 By Balance c/d 26,000

1,97,750 1,97,750

Branch Cash A/c
` `
1-1-10 To Balance b/d 5,000 By Bank Remit to
H.O.
2,22,500
To Branch Stock
To Bank (as per contra)
To Branch Debtors
59,000
12,000
1,71,000
By Branch
Adjustment A/c
(exp. paid by
H.O.)
By Branch
Adjustment
12,000

A/c [Bal. fig.
(exp. paid
10,000
by Branch)]
31-12-10 By Balance c/d 2,500

2,47,000 2,47,000

Branch Adjustment A/c
` `
To Stock Reserve (on
closing stock
By Stock Reserve opening 5,000
(48,000 1/6) 8,000 By Goods sent to Branch A/c 40,000
To Gross Profit c/d 39,000 By Branch Stock A/c 2,000
47,000 47,000
To Branch Expenses By Gross Profit b/d 39,000
(paid by HO : ` 12,000
and paid by Branch
` 10,000) 22,000
To Branch Debtors-Bad
debts
750
To Net Profit 16,250
39,000 39,000
Goods Sent to Branch A/c
` `
To Branch Adjustment A/c 40,000 By Branch to Stock A/c 2,40,000
To Purchase A/c - Transfer 2,00,000
2,40,000 2,40,000
(b) Debtors Method: Under such a method, the principal accounts that will be maintained are:
The Branch Account;
The Goods Sent To Branch Account; and
The Stock Reserve Account.
Entries in these accounts will be made in the following manner:
Transaction Account debited Account credited
(a) Goods sent to Branch at Branch A/c Goods Sent to Br. A/c
selling price
(b) Loading being the Goods Sent to Br. A/c Branch A/c
difference between selling

price and cost of goods
(c) Returns to H.O. at selling price Goods Sent to Br. A/c Branch A/c
(d) Loading in respect of Branch A/c Goods Sent to Br. A/c
goods returned to H.O.
(e) Loading included in the Stock Reserve A/c Branch A/c
opening stock to reduce it
(f) Closing stock at selling price Branch Stock A/c Branch A/c
(g) Loading included in closing Branch A/c Stock Reserve A/c
stock to reduce it to cost
It will be observed that entries in the Branch Account in respect of goods sent to a branch or
returned by it, as well as those for the opening and closing stock, will be at selling price. In
consequence, the Branch Account is written up at selling price.
Hence the Branch Account will not correctly show the trading profit of the Branch unless these
amounts are adjusted to cost. Such an adjustment is effected by making contra entries in
Goods Sent to Branch A/c and Stock Reserve Account. In respect of closing stock at branch
for the purpose of disclosure in the Balance Sheet, the credit balance in the Stock Reserve
Account at the end of the year will be deducted from the value of the closing stock, so as to
reduce it to close; it will be carried forward as a separate balance to the following year, for
being transferred to the credit of the Branch Account.
Illustration 5
Take figures fromIllustration 4 and prepare branch account following debtors method.
Solution
Books of Harrison
New Delhi Branch Account
1-1-2010 ` `
To Balance b/d By Balance b/d
Stock 30,000 Stock Reserve 5,000
Debtors 32,750 By Goods Sent to Branch A/c 40,000
Cash 5,000 By Bank-Remittance
To Goods Sent to Branch A/c 2,40,000 received fromthe Branch
To Bank (Exp. paid by H.O.) 12,000 Cash sales 59,000
To Net Profit Transferred to
H.O.
Drs. Collection 1,63,500
Profit and Loss A/c 16,250 (Net of expense) 2,22,500
To Balance c/d (Stock reserve
on closing stock) 8,000 By Balance c/d

Stock (including Transit) 48,000
Debtors 26,000
Cash
2,500
3,44,000 3,44,000
(c) Double Column Method: Without writing up a Branch Stock and a Branch Adjustment
Account, it is also practicable to record all the relevant figures only in one account, by having
two separate columns. Under such a method, while the first column would disclose the amount
of gross profit and the value of stock carried forward at cost the second column would not
disclose profit or loss, but would balance by including therein the value of closing stock at
selling price provided that there has been no physical loss of stocks.
This method is similar to the Memorandum Column Method for recording the value of goods
sent out for sale on consignment basis both at the invoice and cost prices.
Illustration 6
Prepare Branch Account using the figures given in Illustration 4 following Double Column
method :
Harrison
New Delhi Branch Account
Inv. Cost Inv. Cost
` ` ` `
To Balance b/d By Cash Sales 59,000 59,000
Opening Stock 30,000 25,000 By Credit Sales 1,65,000 1,65,000
To Goods Sent to By Balance c/d
Branch A/c 2,40,000 2,00,000 Closing stock 48,000 40,000
To Stock Adjustment A/c 2,000 1,667
To Gross Profit trans-
ferred to P&L A/c 37,333
2,72,000 2,64,000 2,72,000 2,64,000

Gross Profit =(` 2,24,000 20/120) =` 37,333.
Illustration 7
Sell Well who carried on a retail business opened a branch X on J anuary 1st, 2010 where all
sales were on credit basis. All goods required by the branch were supplied fromthe Head
Office and were invoiced to the branch at 10% above cost.

The following were the transactions:
J an. 2010 Feb. 2010 March 2010
` ` `
Goods sent to Branch (Purchase Price) 40,000 50,000 60,000
Sales as shown by the branch monthly report 38,000 42,000 55,000
Cash received fromDebtors and remitted to H.O. 20,000 51,000 35,000
Returns to H.O. (Invoice price to Branch) 1,200 600 2,400
The stock of goods held by the branch on March 31, 2010 amounted to ` 53,400 at invoice to branch.
Record these transactions in the Head Office books, showing balances as on 31st March,
2010 and the branch gross profit for the three months ended on that date.
All workings should formpart of your solution.
Solution
Books of Sell Well
Branch Account
` `
To Goods sent to Branch A/c By Cash-collected from
debts
1,06,000

110
1,50,000
100

1,65,000 By Goods sent to Br.-
returns
4,200
To Stock Reserve (W.N.2) 4,855 By Goods sent to Br.
(W.N. 1)
14,618
To Balance Profit to General
Profit & Loss A/c 37,363 By Balance c/d
Stock 53,400
Debtors 29,000 82,400
2,07,218 2,07,218
MemorandumBranch Debtors Account
2010 ` 2010 `
Jan. 1 To Balance b/d - Jan-
Jan- Mar. By Cash/Bank 1,06,000
Mar. To Sales 1,35,000 By Balance c/d 29,000
1,35,000 1,35,000
Goods Sent to Branch Account
` `
To Branch A/c (Returns) 4,200 By Branch A/c 1,65,000
To Branch A/c (Loading) 14,618
To Purchases A/c 1,46,182
1,65,000 1,65,000


Working Notes:
1. Loading on Goods sent to Branch = 1/11 of (` 1,65,000 ` 4,200) = ` 14,618
2. Stock Reserve = 1/11 of 53,400 = ` 4,855
Illustration 8
Hindustan Industries Mumbai has a branch in Cochin to which office goods are invoiced at
cost plus 25%. The branch sells both for cash and on credit. Branch Expenses are paid direct
fromhead office, and the Branch has to remit all cash received into the Head Office Bank
Account.
Fromthe following details, relating to calendar year 2010, prepare the accounts in the Head
Office Ledger and ascertain the Branch Profit. Branch does not maintain any books of
account, but sends weekly returns to the Head Office:
`
Goods received fromHead Office at invoice price 6,00,000
Returns to Head Office at invoice price 12,000
Stock at Cochin as on 1st J an., 2010 60,000
Sales in the year - Cash 2,00,000
Credit 3,60,000
Sundry Debtors at Cochin as on 1st J an. 2010 72,000
Cash received fromDebtors 3,20,000
Discount allowed to Debtors 6,000
Bad debts in the year 4,000
Sales returns at Cochin Branch 8,000
Rent, Rates, Taxes at Branch 18,000
Salaries, Wages, Bonus at Branch 60,000
Office Expenses 6,000
Stock at Branch on 31st Dec. 2010 at invoice price 1,20,000
Solution
Books of Hindustan Industries, Mumbai
Cochin Branch Stock Account
2010 ` 2010 `
Jan. To Balance b/d 60,000 By Bank A/c (Cash sales) 2,00,000
To Goods sent to Branch A/c 6,00,000 By Branch Debtors (Cr. sales) 3,60,000
To Branch Debtors A/c By Goods sent to Branch
(sales return) 8,000 (Ret. to H.O.) 12,000

To Branch P & L A/c (surplus) 24,000 By Balance c/d (closing
stock)
1,20,000
6,92,000 6,92,000
Cochin Branch Stock Adjustment Account
2010 ` 2010 `
To Goods sent to Branch
A/c (1/5 of ` 12,000)
(on returns)
2,400 Jan. By Balance b/d
(1/5 of ` 60,000)
12,000
To Branch P & L A/c
(Profit on sale at
invoice price)
1,05,600 By Goods sent to Br. A/c
(1/5 of ` 6,00,000)
1,20,000
To Balance c/d (1/5 of
` 1,20,000)
24,000
1,32,000 1,32,000

Goods Sent to Branch Account
2010 ` 2010 `
To Cochin Branch By Cochin Br. Stock A/c 6,00,000
Stock Adjustment A/c 1,20,000 By Cochin Br. Stock Adj. A/c 2,400
To Cochin Br. Stock A/c (Ret.) 12,000
To Purchases A/c 4,70,400
6,02,400 6,02,400

Branch Debtors Account
2010 ` 2010 `
Jan. To Balance b/d 72,000 By Bank 3,20,000
To Branch Stock A/c 3,60,000 By Branch P & L A/c
By Discount 6,000
By Bad Debts 4,000 10,000
By Branch Stock (Sales Ret.) 8,000
4,32,000 4,32,000
Branch Expenses Account
` `
To Bank A/c (Rent, Rates &
Taxes)
18,000 By Branch Profit & Loss A/c
(Transfer)
84,000
To Bank A/c (Salaries & 60,000

Wages)
To Bank A/c (office exp.) 6,000
84,000 84,000

Branch Profit &Loss Account for the year ending 31st Dec. 2010
` `
To Branch Expenses A/c 84,000 By Branch Stock Adj. A/c 1,05,600
Discount 6,000 By Branch stock A/c
Bad debts 4,000 10,000 (Sale over invoice price) 24,000

To Net Profit to
Profit & Loss A/c 35,600
1,29,600 1,29,600

Illustration 9
Arnold of Delhi, trades in Ghee and Oil. It has a branch at Lucknow. He dispatches 25 tins of
Oil @ ` 1,000 per tin and 15 tins of Ghee @ ` 1,500 per tin on 1st of every month. The branch
incurs some expenditure which is met out of its collections; this is in addition to expenditure
directly paid by Head Office.
Following are the other details:
Delhi Lucknow
` `
Purchases Ghee 14,75,000 -
Oil 29,32,000 -
Direct expenses 3,83,275 -
Expenses paid by H.O. - 14,250
Sales Ghee 18,46,350 3,42,750
Oil 27,41,250 3,15,730
Collection during the year (including Cash Sales) - 6,47,330
Remittance by Branch to Head Office - 6,13,250

(Delhi)
Balance as on: 1-1-2010 31-12-2010
Stock : Ghee 1,50,000 3,12,500
Oil 3,50,000 4,17,250
Debtors 7,32,750 -
Cash on Hand 70,520 55,250
Furniture & Fittings 21,500 19,350
Plant/Machinery 3,07,250 7,73,500


(Lucknow)
Balance as on: 1-1-2010 31-12-2010
Stock : Ghee 17,000 13,250
Oil 27,000 44,750
Debtors 75,750 -
Cash on Hand 7,540 12,350
Furniture & Fittings 6,250 5,625
Plant/Machinery -
Addition to Plant/Machinery on 1-1-2010 ` 6,02,750.
Rate of Depreciation: Furniture / Fittings @ 10% and Plant / Machinery @ 15% (already
adjusted in the above figures).
The Branch Manager is entitled to 10% commission after charging such commission whereas,
the General Manager is entitled to 10% commission on overall company profits after charging
such commission. General Manager is also entitled to a salary of ` 2,000 p.m. General
expenses incurred by H.O. ` 24,000.
Prepare Branch Account in the head office books and also prepare the Arnolds Trading and
Profit and Loss A/c (excluding branch transactions).
Solution
In the books of Arnold
LucknowBranch Account
` `
To Balance b/d By Bank (Remittance to
H.O.)
6,13,250
Opening stock: By Balance c/d
Ghee 17,000 Closing stock:
Oil 27,000 Ghee 13,250
Debtors 75,750 Oil 44,750
Cash on hand 7,540 Debtors (W.N. 1) 86,900
Furniture & fittings 6,250 Cash on hand (W.N. 2) 12,350
To Goods sent to Branch A/c Furniture & fittings 5,625
Ghee 2,70,000
Oil 3,00,000
To Bank (Expenses paid by
H.O.)
14,250
To Branch Manager
Commission (` 58,335
1/11)
5,303
To Net Profit Transferred
to General P & L A/c 53,032
7,76,125 7,76,125

Arnold
Trading and Profit and Loss account for the year ended 31st December, 2010
(Excluding branch transactions)
` `
To Opening Stock: By Sales:
Ghee 1,50,000 Ghee 18,46,350
Oil 3,50,000 Oil 27,41,250
To Purchases: By Closing Stock:
Ghee 14,75,000 Ghee 3,12,500
Less: Goods sent Oil 4,17,250
to Branch (2,70,000) 12,05,000

Oil 29,32,000
Less: Goods sent
to Branch 3,00,000 26,32,000

To Direct Expenses 3,83,275
To Gross Profit 5,97,075
53,17,350 53,17,350
To Managers Salary 24,000 By Gross Profit 5,97,075
To General Expenses 24,000 By Branch Profit transferred 53,032
To Depreciation
Furniture @ 10% 2,150
Plant & Machinery
@ 15% 1,36,500 1,38,650

To General Managers
Commission @ 10%
(i.e., 4,63,457 1/11) 42,132
To Net profit 4,21,325
6,50,107 6,50,107

Working Notes :
(1) Debtors Account
` `
1-1-10 To Balance b/d 75,750 31-12-10 By Cash Collections 6,47,330
To Sales made during By Balance c/d 86,900
the year:
Ghee 3,42,750
Oil 3,15,730
7,34,230 7,34,230


(2) Branch Cash A/c
` `
1-1-10 To Balance b/d 7,540 By Remittance 6,13,250
To Collections 6,47,330 By Exp. (Balance fig.) 29,270
31-12-10 By Balance c/d 12,350
6,54,870 6,54,870
3.3 Goods invoiced at wholesale price to retail branches
When retail branches (shops) are started by manufacturers, the profit properly attributable to
such shops is the difference between the sale proceeds of goods at the shops and the
wholesale price of the goods sold. For the purpose, it is assumed that the manufacturer would
always be able to sell the goods on wholesale terms and thereby realises profit equal to the
difference between the wholesale price and the cost. Many concerns, therefore, invoice
goods to such shops at wholesale price and determine profit or loss on sale of goods on this
basis. Accordingly, Branch Stock Account or the Trading Account is debited with:
(a) the value of opening stock at the Branch; and
(b) price of goods sent during the year at wholesale price.
It is credited by:
(a) sales effected at the shop; and
(b) closing stock of goods valued at wholesale price.
The value of goods lost due to accident, theft etc. also is credited to the Branch Stock Account
or Trading Account calculated at the wholesale price. At this stage, the Branch Stock or
Trading Account will reveal the amount of gross profit (or loss). It is transferred to the Branch
Profit and Loss Account. On further being debited with the expenses incurred at the shop and
the wholesale price of goods lost, the Branch Profit and Loss Account will disclose the net
profit (or loss) at the shop.
Since the closing stock at the branch has to be valued at wholesale price, it would be
necessary to create a stock reserve equal to the difference between its wholesale price and its
cost (to the head office) by debiting the amount in the Head Office Profit and Loss Account.
This Stock Reserve is carried down to the next year and then transferred to the credit of the
(Head Office) Profit and Loss Account.
4. Independent Branches
Independent branches maintain comprehensive account books for recording their transactions;
therefore a separate trial balance of each branch can be prepared. The head office maintains
one ledger account for each such branch, wherein all transactions between the head office
and the branches are recorded. The head office A/c in branch books and Branch A/c in head
office books is maintained respectively.

Transactions Head office books Branch books
(i) Dispatch of goods to
branch by H.O.
Branch A/c
To Good sent to
Branch A/c
Dr. Goods received. from
H.O. A/c
To Head Office A/c

Dr.
(ii) When goods are Goods sent to Branch A/c Dr. Head Office A/c Dr.
returned by the Branch
to H.O.
To Branch A/c To Goods recd. from H.O. A/c
(iii) Branch Expenses No Entry Expenses A/c Dr.
are paid by the Br. To Cash A/c
(iv) Branch Expenses Branch A/c Dr. Expenses A/c Dr.
paid by H.O. To Bank To Head Office A/c
(v) Outside purchases No Entry Purchases A/c Dr.
made by the Br. To Bank (or) Crs. A/c
(vi) Sales effected by No Entry Cash or Debtors A/c Dr.
the Branch To Sales
(vii) Collection from Cash or Bank A/c Dr. Head office A/c Dr.
Debtors of the Br. recd.
by H.O.
To Branch A/c To Sundry Drs. A/c
(viii) Payment by H.O. for
purchase made by Br.
Branch A/c
To Bank
Dr. Purchase (or) Sundry Creditors A/c
To Head Office
Dr.
(ix) Purchase of Asset No Entry Sundry Assets Dr.
by Branch To Bank (or) Liability
(x) Asset purchased by Branch Asset A/c Dr. Head office Dr.
the Br. but Asset A/c
retained at H.O. books
To Branch A/c To Bank (or) Liability
(xi) Depreciation on (x) Branch A/c Dr. Depreciation A/c Dr.
above To Branch Asset To Head Office A/c
(xii) Remittance of funds Branch A/c Dr. Bank A/c Dr.
by H.O. to Branch To Bank To Head Office
(xiii) Remittance of funds by
Branch to H.O.
Reverse entry of(xii)
above
Reverse entry of (xii) above
(xiv) Transfer of goods (Recipient) Br. A/c Dr. Supplying Br. H.O. A/c Dr.
from one Branch to
another branch
To Supplying Branch
A/c
To Goods Received
from H.O. A/c

Recipient Branch
Goods Received from H.O. A/c Dr.
To Head Office A/c
Students may find a few further practical situations and it is hoped that they can pass entries
on the basis of accounting principles explained above.

The final result of these adjustments will be that so far as the Head Office is concerned, the
branch will be looked upon either as a debtor or creditor, as a debtor if the amount of its
assets is in excess of its liabilities and as a creditor if the position is reverse.
A debit balance in the Branch Account should always be equal to the net assets at the
branch. The important thing to remember, when independent sets of accounts are maintained,
is that the branch and head office books are connected with each other only through the
medium of the Branch and the Head Office Account of their component which are converse of
each other.; also when accounts of the branch and head office are consolidated both the
Branch and Head Office Accounts will be eliminated.
5. Adjustment and Reconciliation of Branch and Head Office
Accounts
If the branch and the head office accounts, converse of each other, do not tally, these must be
reconciledbefore the preparation of the final accounts of the concern as a whole.
For example if Head Office has sent goods worth `50,000 but the branch has received till the
closing date goods only `40,000, then the branch should treat `10,000 as goods in transit and
should pass the following entry :
Dr. Cr.
Goods in transit A/c Dr. 10,000
To Head Office A/c 10,000
However, there will be no entry in Head office books being the point where the event has been
recorded in full, hence no further entries in Head office books.
5.1 Reasons for Disagreement
Following are the possible reasons for the disagreement between Branch A/c in Head office books
and Head office A/c in Branch books on the closing date:
Goods dispatched by the Head office not received by the branch. These goods may be
in transit or loss in transit.
Goods returned by the branch to Head Office may have been received by the H.O.
Again, these goods may be in transit or lost in transit.
Sum remitted by Head office to branch or vice versa remaining in transit on the closing date.
Receipt of income or payment or expenses relating to the Branch transacted by the
head office or vice versa, hence not recorded at the respective ends wherein they are
normally to be recorded.
The technique of reconciliation has been illustrated through the example given below :
Head office Branch
Dr. Cr. Dr. Cr.
Goods sent to Branch 1,50,000 -

Goods recd. from H.O. A/c - 1,40,000
Branch A/c 1,12,000
Head office A/c - - - 78,500
On analysis of Branch A/c in Head office books and Head office A/c in branch books, you find:
`15,000 remitted by the branch has not been received, hence not recorded in the head
office books.
Direct collection of `10,500 from a customer of the branch by Head office not informed
to the branch, hence not recorded by the branch.
A sum of `14,500 paid by branch to the suppliers of head office not recorded at Head
office.
Head office expenditure allocation to the branch `12,000 not recorded in the branch.
`7,500 being FD interest of head office received by the branch on oral instructions from
H.O., not recorded in the head office books.
Head Office Books Branch Books
Dr. Cr. Dr. Cr.
` ` ` `
(i) Goods in transit (`
10,000)
- - Goods in Transit
A/c
10,000
To Head office
A/c
10,000
(ii) Cash in Transit : Cash in Transit A/c 15,000 (No Entry)
To Branch A/c 15,000
(iii) Direct Collection by Head Office A/c 10,500
H.O. on behalf of the
Branch
To Debtors A/c 10,500
(iv) Direct payment of `
14,500 by Branch on
Sundry Crs. A/c 14,500
behalf of H.O To Branch A/c 14,500
(v) Expenditure Allocated to
Branch
Branch Exp. A/c 12,000
To H.O. A/c 12,000
(vi) Fixed Deposit interest Branch A/c 7,500
of ` 7,500 directly
received by the Branch
To Sundry
Income
7,500
In Branch Books
Head Office Account
` `
To Sundry Debtors A/c 10,500 By Balance b/d 78,500

To Balance c/d 90,000 By Goods in transit 10,000
By Branch expenses 12,000
1,00,500 1,00,500
By Balance b/d 90,000
In the Books of Head Office
Branch A/c
` `
To Balance b/d 1,12,000 By Cash in Transit 15,000
To Sundry Income 7,500 By Sundry Creditors 14,500
1,19,500 1,19,500
Students may note (i) the balance of Head Office A/c in Branch books and Branch A/c in Head
Office books have tallied (ii) Adjustment are made only at the point:
Where the recording has been omitted, and
Other than the point where action has been effected.
5.2 Other points
(1) Inter-branch transactions are usually adjusted as if they were entered into only with the
head office. It is a very convenient method of treating such transaction especially where the
number of branches are large. Suppose Kolkata Branch incurred an expenditure on
advertisement of `1,000 on account of Delhi Branch, the entries that would be made in such a
case would be as follows:

Dr. Cr.
`
In Kolkata Books:
Head Office A/c Dr. 1,000
To Cash 1,000
In Delhi Books:
Advertisement A/c Dr. 1,000
To H.O. A/c 1,000
In H.O. Books:
Delhi Branch A/c Dr. 1,000
To Kolkata Branch A/c 1,000

(2) Often the accounts of fixed assets of a branch are kept in the head office books; in such
a case, at the end of the year, the amount of depreciation on the assets is debited to the
branch concerned by recording the following entry:
Branch Account Dr.
To Branch Asset Account
The branch will pass the following entry:
Depreciation Account Dr.
To Head Office A/c
(3) Usually the head office has to devote considerable time in attending to the affairs of the
branch; on that account, it may decide to raise a charge against the branch in respect of the
cost of such time. In such a case the amount is debited to the branch as Expenses and is
credited to appropriate revenue head such as Salaries Accounts, General Charges Account,
Entertainment Account etc. The branch credits the H.O. Account and debits Expenses
Account.
6. Incorporation of Branch Balance in Head Office Books
The method that will be adopted for incorporating the trading result of the branch with that of
the head office would depend on whether it is desired to prepare separate Profit & Loss
Account and Balance Sheet of the branch and the Head Office or consolidated statement of
account of both branch and head office.
In the first-mentioned case, the amount of profit or loss shown by the Profit & Loss Account of
the branch only will be transferred to Head office Account in the branch books and a converse
entry will be passed in the Head Office books by debit to the Branch Account. This method
has already been illustrated above. In such a case, not only the Profit & Loss Account of the
branch and that of the head office would be prepared separately but also there would be
separate Balance Sheet for the branch and the head office. The branch Balance Sheet would
show the amount advanced by the head office to it, as capital. In the head office Balance
Sheet, the same amount would be shown as an advance to the branch.
If however, it is desired to prepare a consolidated Profit & Loss Account and Balance Sheet,
individual balances of all the revenue accounts would be separately transferred to the Head
Office Account by debit or credit in the branch books and the converse entries would be
passed in the head office books. The effect thereof will be similar to the amount of net profit or
loss of the branch having been transferred since it would be composed of the balances that
have been transferred. In case it is also desired that consolidated balance sheet of the branch
and the head office should be prepared, it will also be necessary to transfer the balance of
assets and liabilities of the branch to the head office. The adjusting entries that would be
passed in this respect are shown below:
(a) Head Office Account Dr.
To Asset (individual) Account


(b) (Individual) Liability Account Dr.
To Head Office Account
Converse entries are passed in the head office books.
It is obvious that after afore-mentioned entries have been passed, the Branch Account in the
Head Office books and Head Office Account in the branch books will be closed and it will be
necessary to restart them at the beginning of the next year.
In consequence, at the beginning of the following year, the under-mentioned entry is recorded
by the branch:
Asset Account (In Detail) Dr.
To Liability Accounts
To H.O. Account (The difference between assets and liabilities)
Illustration 10
Messrs Ramchand & Co., Hyderabad have a branch in Delhi. The Delhi Branch deals not only
in the goods fromHead Office but also buys some auxiliary goods and deals in them. They,
however, do not prepare any Profit & Loss Account but close all accounts to the Head Office
at the end of the year and open themafresh on the basis of advice fromtheir Head Office. The
fixed assets accounts are also maintained at the Head Office.
The goods fromthe Head Office are invoiced at selling prices to give a profit of 20 per cent on
the sale price. The goods sent fromthe branch to Head Office are at cost. Fromthe following
prepare the Branch Account, Branch Trading and Profit & Loss Account and Branch Assets
Account in the Head Office Books.
Trial Balance of the Delhi Branch as on 31-12-2010
Debit ` Credit `
Head office opening Sales 1,00,000
balance 1-1-10 15,000 Goods to H.O. 3,000
Goods fromH.O. 50,000 Head Office Current A/c 15,000
Purchases 20,000 Sundry Creditors 3,000
Opening Stock (H.O. goods
at invoice prices) 4,000
Opening Stock of other goods 500
Salaries 7,000
Rent 3,000
Office expenditure 2,000
Cash on Hand 500
Cash at Bank 4,000
Sundry Debtors 15,000
1,21,000 1,21,000
The Branch balances as on 1st J anuary, 2010, were as under: Furniture ` 5,000; Sundry
Debtors ` 9,500; Cash ` 1,000, Creditors ` 30,000; Stock (H.O. goods at invoice price)

` 4,000; other goods ` 500. The closing stock at branch of the head office goods at invoice
price is `3,000 and that of purchased goods at cost is ` 1,000. Depreciation is to be provided
at 10 per cent on branch assets.
Solution
Delhi Branch
Branch Trading and Profit &Loss Account
for the year ended 31st Dec., 2010
` `
To Opening Stock: By Sales 1,00,000
Head office Goods 3,200 By Goods from Branch 3,000
Others 500 3,700 By

Closing Stock :

To Goods To Branch 40,000 Head Office goods 2,400
To Purchases 20,000 Others 1,000 3,400
To Gross Profit c/d 42,700
1,06,400 1,06,400

To Salaries 7,000 By Gross profit b/d 42,700
To Rent 3,000
To Office Expenses 2,000
To Dep. on furniture
@ 10%
500
To Net profit 30,200
42,700 42,700

Branch (Fixed) Assets Account (In Head Office Books)
2010 ` 2010 `
Jan. 1 To Balance b/d 5,000 Dec. 31 By Delhi Branch A/c 500
(Depreciation)
5,000 5,000
2011
Jan. 1 To Balance b/d 4,500
Cash/Bank Account (Branch Books)
` ` `
To Balance b/d 1,000 By Salaries 7,000
To Sales Proceeds By Rent 3,000
Sales 1,00,000 By Office Exp. 2,000

Opening balance By Creditors* 47,000
of Debtors 9,500 By Head Office (Balancing fig.) 32,000

1,09,500 By Cash Balance 500
Less: Closing balance (15,000) By Bank Balance 4,000
Cash Received 94,500 94,500
95,500 95,500

*Opening Balance + Purchases Closing balance = Payment
` 30,000 + ` 20,000 ` 3,000 = ` 47,000.
Trial Balance of Delhi Branch as on 1-1-2010
Dr. Cr.
` `
Debtors 9,500
Cash 1,000
Stock H.O. Goods 4,000
Others 500 4,500

Creditors 30,000
Head Office Account 15,000
30,000 30,000

Head Office Account
` `
To Balance (transfer) 15,000 By Goods from Head Office 50,000
To Cash 32,000
To Goods sent 3,000
50,000 50,000

Credit balance in Head Office Account before this transfer will be ` 15,000 credit.
Note : Furniture A/c is maintained in Head office books; it is not a part of either opening or
closing balance.
Illustration 11
Ring Bell Ltd. Delhi has a Branch at Bombay where a separate set of books is used. The
following is the trial balance extracted on 31st December, 2010.

Head Office Trial Balance
` `
Share Capital (Authorised: 10,000 Equity Shares of ` 100 each):
Issued: 8,000 Equity Shares 8,00,000
Profit & Loss Account - 1-1-2010 25,310
InterimDividend paid - Aug. 2010 30,000
General Reserve 1,00,000
Fixed Assets 5,30,000
Stock 2,22,470
Debtors and Creditors 50,500 21,900
Profit for 2010 82,200
Cash Balance 62,730
Branch Current Account 1,33,710
10,29,410 10,29,410
Branch Trial Balance
` `
Fixed Assets 95,000
Profit for 2010 31,700
Stock 50,460
Debtors and Creditors 19,100 10,400
Cash Balance 6,550
Head Office Current Account 1,29,010
1,71,110 1,71,110

The difference between the balances of the Current Account in the two sets of books is
accounted for as follows:
(a) Cash remitted by the Branch on 31st December, 2010, but received by the Head Office on
1st J anuary 2011 - ` 3,000.
(b) Stock stolen in transit fromHead Office and charged to Branch by the Head Office, but not
credited to Head Office in the Branch books as the Branch Manager declined to admit any
liability (not covered by insurance) - ` 1,700.
Give the Branch Current Account in Head Office books after incorporating Branch Trial Balance
through journal. Also prepare the companys Balance Sheet as on 31st December, 2010.


Solution
The Branch Current Account in the Head Office Books and Head Office Current Account in the
Branch Books do not show the same balances. Therefore, in order to reconcile them, the
following journal entries will be passed in the Head Office books :
Journal Entries
Dr. Cr.
2010 ` `
Dec., 31 Cash in Transit A/c Dr. 3,000
To Branch Current A/c 3,000
(Cash sent by the Branch on 31st Dec., 2010
but received at H.O. on 1st Jan., 2011)
Loss by theft A/c Dr. 1,700
To Branch Current A/c 1,700
(Stock lost in transit from H.O. to Branch)
In order to incorporate, in the H.O. books, the given Branch trial balance which has been
drawn up after preparing the Branch Profit & Loss Account, the following journal entries will be
necessary:
Journal Entries
2010 ` `
Dec. 31 Branch Current Account Dr. 31,700
To Profit & Loss Account 31,700
(Branch Profit for 2010)
Branch Fixed Assets Dr. 95,000
Branch Stock Dr. 50,460
Branch Debtors Dr. 19,100
Branch Cash Dr. 6,550
To Branch Current Account 1,71,110
(Branch assets brought into H.O. Books)
Branch Current A/c Dr. 10,400
To Branch Creditors 10,400
(Branch creditors brought into H.O. Books)
Branch Current Account
` `
To Balance b/d 1,33,710 By Cash in transit 3,000
To Profit & Loss A/c 31,700 By Loss of theft 1,700
To Branch Creditors 10,400 By Sundry Branch Assets 1,71,110
1,75,810 1,75,810

Profit and Loss Account for 2010
` `
To Loss by Theft 1,700 By Balance b/d 25,310
To Interim Dividend for Aug., 2010 30,000 By Years Profit : H.O. 82,200
To Balance c/d 1,07,510 Branch 31,700
1,39,210 1,39,210
Balance Sheet of the Company as on 31st Dec., 2010
Particulars Note No Amount (`)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 8,00,000
(b) Reserves and Surplus 2 2,07,510
(2) Current Liabilities
Trade payables 3 32,300
Total 10,39,810
II. Assets
(1) Non-current assets
Fixed assets 4 6,25,000
(2) Current assets
(a) Inventories 5 2,72,930
(b) Trade Receivables 6 69,600
(c) Cash and cash equivalents 7 72,280
Total 10,39,810
Notes to Accounts
`
1. Share Capital
Authorised capital :
10,000 Equity Shares of ` 100 each 10,00,000
Issued and Subscribed Capital :
8,000 Equity Shares of ` 100 each fully paid 8,00,000
2. Reserves and Surplus
General Reserve 1,00,000
Profit & Loss Account 1,07,510 2,07,510

3. Trade payables
Creditors
H.O. 21,900
Branch 10,400 32,300
4. Fixed Assets
H.O. 5,30,000
Branch 95,000 6,25,000
5. Inventories
H.O. 2,22,470
Branch 50,460 2,72,930
6. Trade Receivables
H.O. 50,500
Branch 19,100 69,600
7. Cash and cash equivalents
Cash in Hand :
H.O. 62,730
Branch 6,550 69,280
Cash in Transit 3,000
72,280
Illustration 12
KP manufactures a range of goods which it sells to wholesale customers only fromits head
office. In addition, the H.O. transfers goods to a newly opened branch at factory cost plus
15%. The branch then sells these goods to the general public on only cash basis.
The selling price to wholesale customers is designed to give a factory profit which amounts to
30% of the sales value. The selling price to the general public is designed to give a gross
margin (i.e., selling price less cost of goods fromH.O.) of 30% of the sales value.
KP operates fromrented premises and leases all other types of fixed assets. The rent and hire
charges for these are included in the overhead costs shown in the trial balances.
Fromthe information given below, you are required to prepare for the year ended 31st Dec.,
2010 in columnar form.
(a) A Profit & Loss account for (i) H.O. (ii) the branch (iii) the entire business.
(b) Balance Sheet as on 31st Dec., 2010 for the entire business.


H.O. Branch
` ` ` `
Raw materials purchased 35,000
Direct wages 1,08,500
Factory overheads 39,000
Stock on 1-1-2010
Raw materials 1,800
Finished goods 13,000 9,200
Debtors 37,000
Cash 22,000 1,000
Administrative Salaries 13,900 4,000
Salesmens Salaries 22,500 6,200
Other administrative &
selling overheads 12,500 2,300
Inter-unit accounts 5,000 2,000
Capital 50,000
Sundry Creditors 13,000
Provision for unrealised profit in
stock
1,200
Sales 2,00,000 65,200
Goods sent to Branch 46,000
Goods received fromH.O. 44,500
3,10,200 3,10,200 67,200 67,200
Notes:
(1) On 28th Dec., 2010 the branch remitted `1,500 to the H.O. and this has not yet been
recorded in the H.O. books. Also on the same date, the H.O. dispatched goods to the branch
invoiced at `1,500 and these too have not yet been entered into the branch books. It is the
companys policy to adjust items in transit in the books of the recipient.
(2) The stock of raw materials held at the H.O. on 31st Dec., 2010 was valued at `2,300.
(3) You are advised that:
there were no stock losses incurred at the H.O. or at the branch.
it is KPs practice to value finished goods stock at the H.O. at factory cost.
there were no opening or closing stock of work-in-progress.
(4) Branch employees are entitled to a bonus of ` 156 under a bilateral agreement.

Solution
In the books of KP
Trading and Profit &Loss Account for the year ended 31st Dec., 2010
H.O. Branch Total H.O. Branch Total
` ` ` ` ` `
To Material
consumed
34,500 - 34,500 By Sales 2,00,000 65,200 2,65,200
Wages 1,08,500 - 1,08,500 Goods
Sent to

Factory
Overhead
s
39,000 - 39,000 Branch 46,000 - -
Opening
stock of
Closing
stock
15,000 9,560 24,560
finished
goods

13,000

9,200

22,200

Goods
from H.O.
46,000
Gross
Profit
66,000 19,560 85,560
2,61,000 74,760 2,89,760 2,61,000 74,760 2,89,760

To Admn.
Salaries
13,900 4,000 17,900 By Gross
Profit
66,000 19,560 85,560
Salesmen
Salaries
22,500 6,200 28,700
Other
Admn. &

Overhead
s
12,500 2,300 14,800
Stock
Reserve

(increase) 47 - 47
Bonus to
Staff
- 156 156
Net Profit 17,053 6,904 23,957
66,000 19,560 85,560 66,000 19,560 85,560

Balance Sheet as on 31st Dec., 2010
H.O. Branch Total H.O. Branch Total
` ` ` ` ` ` `
Capital 50,000 - 50,000 Fixed Assets - - -
Profit : H.O. 17,053 Current

Assets
Branch 6,904 23,957 23,957 Raw material 2,300 2,300
Trade
Creditors
13,000 13,000 Finished
Goods
15,000 9,560 23,313
*
Bonus
Payable
156 156 (Less Stock
Res.)

H.O.
Account
10,404 Debtors 37,000 - 37,000
Stock
Reserve
1,247 Cash
(including
23,500 1,000 24,500
transit item)
Branch A/c 10,404*
88,204 10,560 87,113 88,204 10,560 87,113
*9,560 100/115 i.e., (8,313 + 15,000) = ` 23,313
** 5,000 + 6,904 1500 = ` 10,404.
7. Incomplete Information in Branch Books
If it is desired that profitability of the branch should be kept secret from the branch staff, the
head office would hold back some key information from the branch, e.g., amount of opening
stock, cost of goods sent to the branch, etc. The head office, in such a case would maintain a
record of goods sent to the branch by passing the entry:
Goods Supplied to the Branch Account Dr.
To Purchases Account
The value of the closing stock will also be adjusted only in head office books.
In such a case, for closing its books at the end of the year, the branch will simply transfer
various revenue accounts to the head office without drawing up a Trading and Profit & Loss
Account.
On that basis, supplemented by the record of transactions maintained at the head office, it will be
possible to construct the Trading and Profit & Loss Account of the branch.
Illustration 13
AFFIX of Kolkata has a branch at Delhi to which the goods are supplied fromKolkata but the
cost thereof is not recorded in the Head Office books. On 31st March, 2010 the Branch
Balance Sheet was as follows :
Liabilities ` Assets `
Creditors Balance 40,000 Debtors Balance 2,00,000
Head Office 1,68,000 Building Extension A/c

closed
by transfer to H.O. A/c
Cash at Bank 8,000
2,08,000 2,08,000

During the six months ending on 30-9-2010, the following transactions took place at Delhi.
` `
Sales 2,40,000 Managers Salary 4,800
Purchases 48,000 Collections fromDebtors 1,60,000
Wages paid 20,000 Discounts allowed 8,000
Salaries (inclusive of advance Discount earned 1,200
of ` 2,000) 6,400 Cash paid to Creditors 60,000
General Expenses 1,600 Building Account (further
payment)
4,000
Fire Insurance (paid for one
year)
3,200 Cash in Hand 1,600
Remittance to H.O. 38,400 Cash at Bank 28,000
Set out the Head Office Account in Delhi books and the Branch Balance Sheet as on
30-9-2010. Also give journal entries in the Delhi books.
Solution
Journal Entries
2010 Dr. Cr.
30 Sept. ` `
Salary Advance A/c Dr. 2,000
To Salaries A/c 2,000
(The amount paid as advance adjusted by debit to Salary
Advance Account)

Prepared Insurance A/c Dr. 1,600
To Fire Insurance A/c 1,600
(Six months premium transferred to the Prepaid Insurance A/c)
Head Office Account Dr. 88,400
To Purchases A/c 48,000
To Wages A/c 20,000
To Salaries A/c 4,400
To General Expenses A/c 1,600
To Fire Insurance A/c 1,600
To Managers Salary A/c 4,800
To Discount Allowed A/c 8,000
(Transfer of various revenue accounts (Dr.) to the H.O.

Account
for closing the accounts)
Sales Accounts Dr. 2,40,000
Discount Earned A/c Dr. 1,200
To Head Office A/c 2,41,200
[Revenue accounts (cr) transferred to H.O.]
Head Office Account Dr. 4,000
To Building Account 4,000
(Transfer of amounts spent on building extension to H.O. A/c)
Head Office Account
2010 ` 2010 `
Sep. 30 To Cash-remittance 38,400 April 1 By Balance b/d 1,68,000
To Sundries (Revenue A/cs) 88,400 Sep. 30 By Sundries 2,41,200
To Building A/c 4,000 (Revenue A/cs)
To Balanced c/d 2,78,400

4,09,200 4,09,200

Balance Sheet of Delhi Branch as on Sept. 30, 2010
Liabilities ` Assets `
Creditors Balances 26,800 Debtors Balances 2,72,000
Head Office Account 2,78,400 Salary Advance 2,000
Prepaid Insurance 1,600
Building Extension A/c
transferred to H.O.
Cash in Hand 1,600
Cash at Bank 28,000
3,05,200 3,05,200
Cash and Bank A/c
31
st
March 2010 ` `
To Balance b/d 8,000 By Wages 20,000
To Collection from Drs. 1,60,000 By Salaries 6,400
By Insurance 3,200
By General Exp. 1,600
By H.O. A/c 38,400
By Managers Salary 4,800
By Creditors 60,000
By Building A/c 4,000

By Balance c/d
By Cash in Hand 1,600
By Cash at Bank 28,000 29,600
1,68,000 1,68,000
Debtors Account
March 2010 ` Sept. 2010 `
To Balance b/d 2,00,000 By Cash Collection 1,60,000
Sept. 2010 By Discount (allowed) 8,000
To Sales 2,40,000 By Balance c/d 2,72,000
4,40,000 4,40,000

1 Oct. 2010 To Balance b/d 2,72,000

Creditors Account
Sept. 2010 ` March 2010 `
To Cash 60,000
To Discount (earned) 1,200 By Balance b/d 40,000
Sept. 2010
To Balance c/d 26,800 By Purchases 48,000
88,000 88,000
1, Oct. 2010
Illustration 14
The following Trial balances as at 31st December, 2010 have been extracted fromthe books
of Major Ltd. and its branch at a stage where the only adjustments requiring to be made prior
to the preparation of a Balance Sheet for the undertaking as a whole.
Head Office Branch
Dr. Cr. Dr. Cr.
` ` ` `
Share Capital 1,50,000
Fixed Assets 75,125 18,901
Current Assets 1,21,809 23,715 (Note 3)
Current Liabilities 34,567 9,721
Stock Reserve, 1st J an., 2010
(Note 2) 693
Revenue Account 43,210 10,250
Branch Account 31,536
Head Office Account 22,645
2,28,470 2,28,470 42,616 42,616

Notes :
1. Goods transferred from Head Office to the Branch are invoiced at cost plus 10% and both
Revenue Accounts have been prepared on the basis of the prices charged.
2. Relating to the Head Office goods held by the Branch on 1st January, 2010.
3. Includes goods received from Head Office at invoice price `4,565.
4. Goods invoiced by Head Office to Branch at `3,641 were in transit at 31st December,
2010, as was also a remittance of `3,500 from the Branch.
5. At 31st December, 2010, the following transactions were reflected in the Head Office
books but unrecorded in the Branch books.
The purchase price of lorry, `2,500, which reached the Branch on December 25; a sum
received on December 30, 2010 from one of the Branch debtors, `750.
You are required:
(i) to record the foregoing in the appropriate ledger accounts in both sets of books;
(ii) to prepare a Balance Sheet as at 31st December, 2010 for the undertaking as a whole.
Solution
H.O. Books
Branch Account
2010 ` 2010 `
Dec. 31 To Balance b/d 31,536 Dec. 31 By Cash in transit 3,500
31,536 31,536

Cash in Transit Account
2010 ` 2010 `
Dec. 31 To Branch A/c 3,500 Dec. 31 By Balance c/d 3,500

Stock Reserve Account
2010 ` 2010 `
Dec. 31 To Balance c/d 746 Jan. 1 By Balance c/d 693
By Reserve A/c 53
746 746

Revenue Account
2010 ` 2010 `
Dec. 31 To Stock Reserve 53 Dec. 31 By Balance c/d 43,210
Balance c/d 43,157
43,210 43,210


Branch Books
Head Office Account
2010 ` 2010 `
Dec.31 To Current Assets 750 Dec. 31 By Balance b/d 22,645
To (Debtors) By Goods in transit 3,641
Balance c/d 28,036 By Motor Vehicle 2,500
28,786 28,786

Goods in Transit Account
2010 ` 2010 `
Dec. 31 To Head Office 3,641 Dec. 31 By Balance c/d 3,641

Motor Vehicle Account
2010 ` 2010 `
Dec. 31 To Head Office 2,500 Dec. 31 By Balance c/d 2,500

Sundry Current Assets A/c
2010 ` 2010 `
Dec. 31 To Balance b/d 23,715 Dec. 31 By H.O. (Remittance
by Debtor) 750
Balance c/d 22,965
23,715 23,715

Balance Sheet of Major Ltd. as on 31st Dec., 2010
Particulars Note No Amount (`)
I. Equity and Liabilities
(1) Shareholder's Funds
Share Capital 1,50,000
(2) Non-Current Liabilities
Long-term borrowings 1 53,407
(3) Current Liabilities 44,288
Total 2,47,695
II. Assets
(1) Non-current assets
Fixed assets 96,526
(2) Current assets 1,51,169
Total 2,47,695


Notes to Accounts
`
Long term borrowings
Secured Loans 53,407
Working Notes :
`
(i) Fixed Assets: Head Office 75,125
Branch 18,901
Motor Vehicle 2,500
96,526

(ii) Current Assets : Head Office 1,21,809
Cash in transit 3,500
Branch (23,715750) 22,965
Stock in transit 3,641
1,51,915
Less : Stock Reserve (746)

1,51,169

(iii) Revenue Account Head Office (43,210 53) 43,157
Branch 10,250
53,407

(iv) Current Liabilities : Head Office 34,567
Branch 9,721
44,288

(v) While incorporating branch profit, Head Office will credit its Profit & Loss A/c by Debiting
Branch. This will increase the branch balance. Similarly branch will transfer net profit and loss
to Head Office Account resulting in an increase in the balance of Head Office A/c by similar
amount.
8. Foreign Branches
Foreign branches generally maintain independent and complete record of business transacted
by them in currency of the country in which they operate. Thus problems of incorporating
balances of foreign branches relate mainly to translation of foreign currency into Indian
rupees. This is because exchange rate of Indian rupees is not stable in relation to foreign
currencies due to international demand and supply effects on various currencies.
9. Accounting for Foreign Branches
For the purpose of accounting, AS 11 (revised 2003) classifies the foreign branches may be
classified into two types:
Integral Foreign Operation;

Non- Integral Foreign Operation.
Let us discuss these two types of foreign branches in detail.
9.1 Integral Foreign Operation (IFO)
It is a foreign operation, the activities of which are an integral part of those of the reporting
enterprise. The business of IFO is carried on as if it were an extension of the reporting
enterprises operations. Generally, IFO carries on business in a single foreign currency, ie. of
the country where it is located. For example, sale of goods imported from the reporting
enterprise and remittance of proceeds to the reporting enterprise.
9.2 Non-Integral Foreign Operation (NFO)
It is a foreign operation that is not an Integral Foreign Operation. The business of a NFO is
carried on in a substantially independent way by accumulating cash and other monetary items,
incurring expenses, generating income and arranging borrowing in its local currency. An NFO
may also enter into transactions in foreign currencies, including transactions in the reporting
currency. An example of NFO may be production in a foreign currency out of the resources
available in such country independent of the reporting enterprise.
The following are the indicators of Non- Integral Foreign Operation-
Control by reporting enterprises - While the reporting enterprise may control the foreign
operation, the activities of foreign operation are carried independently without much
dependence on reporting enterprise.
Transactions with the reporting enterprises are not a high proportion of the foreign
operations activities.
Activities of foreign operation are mainly financed by its operations or from local
borrowings. In other words it raises finance independently and is in no way dependent
on reporting enterprises.
Foreign operation sales are mainly in currencies other than reporting currency.
All the expenses by foreign operations are primarily paid in local currency, not in the
reporting currency.
Day-to-day cash flow of the reporting enterprises is independent of the foreign
enterprises cash flows.
Sales prices of the foreign enterprises are not affected by the day-to-day changes in
exchange rate of the reporting currency of the foreign operation.
There is an active sales market for the foreign operation product.
The above are only indicators and not decisive/conclusive factors to classify the foreign
operations as non-integral, much will depend on factual information, situations of the particular
case and, therefore, judgment is necessary to determine the appropriate classification.

Controversies may arise in deciding the foreign branches of the enterprises into integral or
non-integral. However, there may not be any controversy that subsidiary associates and joint
ventures are non-integral foreign operation.
In case of branches classified as independent for the purpose of accounting are generally
classified as non-integral foreign operations.
10. Change in Classification
When there is a change in classification, accounting treatment is as under-
10.1 Integral to Non-Integral
(i) Translation procedure applicable to non-integral shall be followed from the date of change.
(ii) Exchange difference arising on the translation of non-monetary assets at the date of re-
classification is accumulated in foreign currency translation reserve.
10.2 Non-Integral to Integral
(i) Translation procedure as applicable to integral should be applied from the date of
change.
(ii) Translated amount of non-monetary items at the date of change is treated as historical cost.
(iii) Exchange difference lying in foreign currency translation reserve is not to be recognized
as income or expense till the disposal of the operation even if the foreign operation
becomes integral.
11. Techniques for Foreign Currency Translation
11.1 Integral Foreign Operation (IFO)
Following are the standard recommendations for foreign currency translation:
(1) All transactions of IFO be translated at the rate prevailing on the date of transaction.
This will require date wise details of the transaction entered by that operation together
with the rates. Weekly or monthly average rate is permitted if there are no significant
variations in the rate.
(2) Translation at the balance sheet date-
(i) Monetary items
1
at closing rate;
(ii) Non-monetary items
2
: The cost and depreciation of the tangible fixed assets is
translated using the exchange rate at the date of purchase of the asset if asset is
carried at cost. If tangible fixed asset is carried at fair value, translation should
be done using the rate existed on the date of the valuation.

1
Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of
money. Cash, receivables and payables are examples of monetary items.
2
Non-monetary items are assets and liabilities other than monetary items. Fixed assets, investments in equity shares,
inventories are examples of non-monetary assets.

(iii) The cost of inventories is translated at the exchange rates that existed when the
cost of inventory was incurred and realizable value is translated applying exchange
rate when realizable value is determined which is generally closing rate.
(iv) Exchange difference arising on the translation of the financial statement of
integral foreign operation should be charged to profit and loss account.
11.2 Non-Integral Foreign Operation
Accounts of non-integral foreign operation are translated using the following principles:
Balance sheet items i.e. Assets and Liabilities both monetary and non-monetary
apply closing exchange rate.
Items of income and expenses At actual exchange rates on the date of
transactions. However, accounting standard allows average rate subject to
materiality.
Resulting exchange rate difference should be accumulated in a foreign currency
translation reserve until the disposal of net investment in non-integral foreign operation.
Illustration 15
S & M Ltd., Bombay, have a branch in Sydney, Australia. Sydney branch is an integral foreign
operation of S & M Ltd.
At the end of 31st March, 2011, the following ledger balances have been extracted fromthe
books of the Bombay Office and the Sydney Office:
Bombay . Sydney
(` thousands) (Austr dollars
thousands)

Debit Credit Debit Credit
Share Capital 2,000
Reserves & Surplus 1,000
Land 500
Buildings (Cost) 1,000
Buildings Dep. Reserve 200
Plant & Machinery (Cost) 2,500 200
Plant & Machinery Dep. Reserve 600 130
Debtors / Creditors 280 200 60 30
Stock (1.4.2010) 100 20
Branch Stock Reserve 4
Cash & Bank Balances 10 10
Purchases / Sales 240 520 20 123
Goods sent to Branch 100 5

Managing Directors salary 30
Wages & Salaries 75 45
Rent 12
Office Expenses 25 18
Commission Receipts 256 100
Branch / H.O. Current A/c 120 7
4,880 4,880 390 390
The following information is also available:
(1) Stock as at 31.3.2011:
Bombay ` 1,50,000
Sydney A $ 3,125
You are required to convert the Sydney Branch Trial Balance into rupees;
(use the following rates of exchange :
Opening rate A $ =` 20
Closing rate A $ =` 24
Average rate A $ =` 22
For Fixed Assets A $ =` 18).
Solution
Sydney Branch Trial Balance (in Rupees)
As on 31st March, 2011
(` 000)
Conversion rate per A$ Dr. Cr.
Plant & Machinery (cost) ` 18 36,00
Plant & Machinery Dep. Reserve ` 18 23,40
Debtors / Creditors ` 24 14,40 7,20
Stock (1.4.2010) ` 20 4,00
Cash & Bank Balances ` 24 2,40
Purchase / Sales ` 22 4,40 27,06
Goods received from H.O. 1,00
Wages & Salaries ` 22 9,90
Rent ` 22 2,64
Office expenses ` 22 3,96
Commission Receipts ` 22 22,00

H.O. Current A/c 1,20
78,70 80,86
Exchange loss (balancing figure) 2,16
80,86 80,86
Illustration 16
Carlin & Co. has head office at New York (U.S.A.) and branch at Mumbai (India). Mumbai
branch is an integral foreign operation of Carlin & Co.
Mumbai branch furnishes you with its trial balance as on 31st March, 2011 and the additional
information given thereafter:
Dr. Cr.
Rupees in thousands
Stock on 1st April, 2010 300
Purchases and sales 800 1,200
Sundry Debtors and creditors 400 300
Bills of exchange 120 240
Wages and salaries 560
Rent, rates and taxes 360
Sundry charges 160
Computers 240
Bank balance 420
New York office a/c 1,620
3,360 3,360
Additional information:
(a) Computers were acquired froma remittance of US $ 6,000 received fromNew York head
office and paid to the suppliers. Depreciate computers at 60% for the year.
(b) Unsold stock of Mumbai branch was worth `4,20,000 on 31st March, 2011.
(c) The rates of exchange may be taken as follows:
on 1.4.2010 @ ` 40 per US $
on 31.3.2011 @ ` 42 per US $
average exchange rate for the year @ ` 41 per US $
conversion in $ shall be made upto two decimal accuracy.

You are asked to prepare in US dollars the revenue statement for the year ended 31st March,
2011 and the balance sheet as on that date of Mumbai branch as would appear in the books
of New York head office of Carlin & Co. You are informed that Mumbai branch account
showed a debit balance of US $ 39609.18 on 31.3.2011 in New York books and there were no
items pending reconciliation.
Solution
Carlin &Co. Ltd.
Mumbai Branch Trial Balance in (US $)
as on 31st March, 2011
Conversion Dr. Cr.
rate per US $ US $ US $
(`)
Stock on 1.4.10 40 7,500.00
Purchases and sales 41 19,512.20 29,268.29
Sundry debtors and creditors 42 9,523.81 7,142.86
Bills of exchange 42 2,857.14 5,714.29
Wages and salaries 41 13,658.54
Rent, rates and taxes 41 8,780.49
Sundry charges 41 3,902.44
Computers 6,000.00
Bank balance 42 10,000.00
New York office A/c 39,609.18
81,734.62 81,734.62
Trading and Profit &Loss Account
for the year ended 31st March, 2011
US $ US $
To Opening Stock 7,500.00 By Sales 29,268.29
To Purchases 19,512.20 By Closing stock 10,000.00
To Wages and salaries 13,658.54 By Gross Loss c/d 1,402.45
40,670.74 40,670.74
To Gross Loss b/d 1,402.45 By Net Loss 17,685.38
To Rent, rates and taxes 8,780.49
To Sundry charges 3,902.44

To Depreciation on computers 3,600.00
(US $ 6,000 0.6)
17,685.38 17,685.38
Balance Sheet of Mumbai Branch
as on 31st March, 2011
Liabilities US $ Assets US $ US $
New York Office A/c 39,609.18 Computers 6,000.00
Less : Net Loss (17,685.38) 21,923.80 Less
:Depreciation
(3,600.00) 2,400.00
Sundry creditors 7,142.86 Closing stock 10,000.00
Bills payable 5,714.29 Sundry debtors 9,523.81
Bank balance 10,000.00
Bills receivable 2,857.14
34,780.95 34,780.95
Summary
Types of branches
Dependent branches
Independent branches
Based on accounting point of view, branches may be classified as follows:
Branches in respect of which the whole of the accounting records are kept at the
head office
Branches which maintain independent accounting records, and
Foreign Branches.
System of accounting
Debtors System: under this system head office makes a branch account. Anything
given to branch is debited and anything received from branch would be credited.
Branch trading and profit and loss account method/branch account method: Under
this system head office prepares (a) profit and loss account (b) branch account
taking each branch as a separate entity.
Stock and debtors system: Under this system head office opens:
Branch stock account

Branch debtors account
Branch asset account
Branch expenses account
Branch adjustment account
Types of Foreign branches :
Integral Foreign Operation (IFO): It is a foreign operation, the activities of which are
an integral part of those of the reporting enterprise.
Non-Integral Foreign Operation (NFO): It is a foreign operation that is not an Integral
Foreign Operation. The business of a NFO is carried on in a substantially
independent way by accumulating cash and other monetary items, incurring
expenses, generating income and arranging borrowing in its local currency.
Non-Integral Foreign Operation -translation
Balance sheet items i.e. Assets and Liabilities both monetary and non-monetary
apply closing exchange rate.
Items of income and expenses At actual exchange rates on the date of
transactions
Resulting exchange rate difference should be accumulated in a foreign currency
translation reserve until the disposal of net investment in non-integral foreign
operation.
Integral Foreign Operation (IFO) - translation
at the rate prevailing on the date of transaction
Translation at the balance sheet date-
Monetary items at closing rate;
Non-monetary items: The cost and depreciation of the tangible fixed assets is
translated using the exchange rate at the date of purchase of the asset if asset is
carried at cost. If tangible fixed asset is carried at fair value, translation should be
done using the rate existed on the date of the valuation.
The cost of inventories is translated at the exchange rates that existed when the cost
of inventory was incurred and realizable value is translated applying exchange rate
when realizable value is determined which is generally closing rate.
Exchange difference arising on the translation of the financial statement of integral
foreign operation should be charged to profit and loss account.


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9

Accounting for Branches Including

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